Branding

How Starbucks’ Growth Destroyed Brand Value

by John Quelch

July 02, 2008

Starbucks announcement that it will close 600 stores in the US is a

long-overdue admission that there are limits to growth.

In February 2007, a leaked internal memo written by founder

Howard Schultz showed that he recognized the problem that his own

growth strategy had created: “Stores no longer have the soul of the

past and reflect a chain of stores vs. the warm feeling of a

neighborhood store.” Starbucks tried to add value through

innovation, offering wi-fi service, creating and selling its own music.

More recently, Starbucks attempted to put the focus back on coffee,

revitalizing the quality of its standard beverages. But none of these

moves addressed the fundamental problem: Starbucks is a mass brand

attempting to command a premium price for an experience that is no

longer special. Either you have to cut price (and that implies a

commensurate cut in the cost structure) or you have to cut

distribution to restore the exclusivity of the brand. Expect the 600

store closings to be the first of a series of downsizing announcements.

Sometimes, in the world of marketing, less is more.

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Schultz sought, admirably, to bring good coffee and the Italian coffee

house experience to the American mass market. Wall Street bought

into the vision of Starbucks as the “third place” after home and work.

New store openings and new product launches fueled the stock price.

But sooner or later chasing quarterly earnings growth targets

undermined the Starbucks brand in three ways.

First, the early adopters who valued the club-like atmosphere of

relaxing over a quality cup of coffee found themselves in a

minority. To grow, Starbucks increasingly appealed to grab and go

customers for whom service meant speed of order delivery rather

than recognition by and conversation with a barista. Starbucks

introduced new store formats like Express to try to cater to this

second segment without undermining the first. But many Starbucks

veterans have now switched to Peets, Caribou and other more

exclusive brands.

Second, Starbucks introduced many new products to broaden

its appeal. These new products undercut the integrity of the

Starbucks brand for coffee purists. They also challenged the baristas

who had to wrestle with an ever-more-complicated menu of drinks.

With over half of customers customizing their drinks, baristas hired

for their social skills and passion for coffee, no longer had time to

dialogue with customers. The brand experience declined as waiting

times increased. Moreover, the price premium for a Starbucks coffee

seemed less justifiable for grab and go customers as McDonald’s and

Dunkin Donuts improved their coffee offerings at much lower prices.

Third, opening new stores and launching a blizzard of new

products create only superficial growth. Such strategies take top

management’s eye off of improving same store sales year-on-year.

This is the heavy lifting of retailing, where a local store manager has

to earn brand loyalty and increase purchase frequency in his

neighborhood one customer at a time. That store manager’s efforts

are undercut when additional stores are opened nearby. Eventually,

the point of saturation is reached and cannibalization of existing store

sales undermines not just brand health but also manager morale.

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None of this need have happened if Starbucks had stayed private and

grown at a more controlled pace. To continue to be a premium-priced

brand while trading as a public company is very challenging. Tiffany

faces a similar problem. That’s why many luxury brands like Prada

remain family businesses or are controlled by private investors. They

can stay small, exclusive and premium-priced by limiting their

distribution to selected stores in the major international cities.

John Quelch is the Charles Edward Wilson

Professor of Business Administration at Harvard

Business School and holds a joint appointment at

Harvard School of Public Health as a professor in

health policy and management.

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